A glummer but still glimmering Poland

By bne IntelliNewsSeptember 19, 2012

Jan Cienski in Warsaw -

The annual economic summit in the Polish mountain resort town of Krynica held every September is usually an occasion for a lot of breast-beating as CEOs and economists boast about how well their companies and the country is doing. But this year the atmosphere was a lot glummer - one of a host of signs the Polish economy is slowing unexpectedly sharply as the sputtering Eurozone slows demand for Polish exports, while Polish consumers become more reluctant to spend out of fear of growing unemployment.

"I'm going to have to start thinking of layoffs because the orders just aren't coming in," complained one executive to another over drinks at one of the boozy receptions that are a feature of the economic summit.

While Poland has tended to outperform expectations in recent years - it was the only EU country to avoid recession in 2009 and has been one of the bloc's fastest growing economies since then - the latest data releases confirm that the situation is getting worse. "We are working on the assumption that the next year will be more difficult," says Cezary Stypulkowski, CEO of Poland's Bre Bank, a unit of Germany's Commerzbank.

Second-quarter GDP expanded at an annual rates of 2.4%, a sharp slowdown from the 3.5% in the first quarter and much worse than most economists were expecting. "Instead of a steady weakening of economic growth, we're seeing a no-holds barred fall," says Malgorzata Starczewska-Krzysztoszek, chief economist for Lewiatan, the Polish employers confederation, noting that the lacklustre growth came at a time when Poland was racing to finish large infrastructure projects ahead of June's European football championships. "That says a lot about the strength of the slowdown."

Downgrading expectations

The finance ministry has also been forced to recalibrate its assumptions for growth. New estimates now predict the Polish economy will grow by only 2.2% next year, down from earlier estimates of 2.9%. As such, Finance Minister Jacek Rostowski has also been forced to abandon his hopes of driving the budget deficit below 3.0% of GDP this year (compared with 5.6% in 2011) admitting that a 3.5% deficit is likelier; the government is again worried about public debt starting to rise beyond the legal threshold of 55% of GDP.

At a news conference held to announce the bad news, Rostowski noted that the situation was similar to 2008-09, when Poland was buffeted by the storm coming from the implosion of the US economy, while now the challenge was coming from the crisis-ridden Eurozone.

The prospect of a sharper-than-expected slowdown has sent Polish policymakers rushing to stimulate growth, partly backing away from their recent budget orthodoxy. The central bank, the only one in the EU to hike rates earlier this year on the back of what then seemed to be strong growth numbers and persistently high inflation, has markedly softened its tone. "Should the incoming data confirm further weakening of economic conditions, and should the risk of increase in inflationary pressure be limited, the Council will consider adjustment of monetary policy," said a statement from the central bank's interest rate setting Monetary Policy Council. Most economists expect the bank to start dropping rates from the current benchmark of 4.75% in the near future.

The Polish Financial Supervision Authority also said it is prepared to revamp its regulations limiting easy access to credit for borrowers, another way of getting people to start spending again. "I'm happy that Polish regulators have taken another look and may loosen their policy," says Krzysztof Kalicki, head of Deutsche Bank's Polish operations.

One of the biggest surprises is that markets barely reacted to the new and looser policy - a sign that the main preoccupation in Europe has swiftly shifted from fiscal austerity to ensuring that growth does not fall off a cliff and trap countries in a downward spiral of falling revenues, higher taxes and slower growth, something already seen in Greece and Spain and, to some extent, in the Czech Republic.

Although the business atmosphere is fairly grim, Poland's plight still looks a lot better than almost everywhere else in the EU. Even with the finance ministry's recalculated estimates, Poland will be one the bloc's fastest growing economies both this year and in 2014. Just after the downbeat budget announcement in early September, Poland managed to place a $2bn dollar-denominated bond issue that was four times oversubscribed at a record low yield of 3.175%.

Peter Attard Montalto, an economist with Nomura, the investment bank, finds that Poland is actually running what he calls a "Goldilocks economy", one that is neither too hot nor too cold, sustaining moderate growth and low inflation that allows a market-friendly monetary policy. "In a world of dying inflation targeting and much slower growth, Poland is as close as you can get to a stable goldilocks economy, in our view - downside risks are certainly present but contained and it is very difficult still to see how they could lead to a recession," he says.

In the end, the Krynica forum businessmen may have been a bit down, but they were complaining at a flashy party funded by some of the country's largest companies, with alcohol flowing liberally and some of the country's top music acts hired to perform - not bad for a downturn.

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